A Term Structure Model for VIX Futures

✍ Scribed by BUJAR HUSKAJ; MARCUS NOSSMAN

• Publisher: John Wiley and Sons
• Year: 2012
• Tongue: English
• Weight: 568 KB
• Volume: 33
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.21550

✦ Synopsis

This study develops a term structure model for VIX futures. Instead of deriving the VIX futures price from a model for the instantaneous variance of the S&P 500 or a model for the VIX, the VIX futures price dynamics are specified exogenously. The empirical features of VIX futures returns (positive skewness, excess kurtosis, and a decreasing volatility term structure for longer term expirations) are captured by assuming that they are normal inverse Gaussian distributed and scaled by a volatility function that is dependent on the maturity. The usefulness of the resulting model is illustrated in two applications: risk management (via calculating value at risk (VaR)) and asset pricing (via pricing hypothetical VIX options). The results show that the model provides a good fit for the empirical term structure of VIX futures, produces good VaR estimates, and is promising for use in pricing VIX options. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:421‐442, 2013